State employee health costs create frustration

Missed estimates have S.D. striving to reduce overrun

Mar. 2, 2014

Written by

Mark Kirkeby

State employee health plan

PROPOSED 2015 BUDGET: $110 million, of which $41 million comes from state taxes SIZE: 13,000 employees, plus another 13,000 dependents PROPOSED INCREASE: $6.7 million more from taxpayers, plus $5.8 million from employees COMPARISON: South Dakota employees don’t pay premiums, as most public and private health plans require. But a recent study found that South Dakota state employees pay higher deductibles and out-of-pocket costs than do employees at large South Dakota businesses. State employees pay an average of 37 percent of the cost of their health care, similar to workers at large private employers and considerably worse than the average of 21 percent paid by employees of a dozen similar states.

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PIERRE — South Dakota is aggressively trying to keep its employee health plan from devouring a bigger and bigger piece of its annual budget.

But the problem isn’t all about rising health care costs.

In December 2012, Gov. Dennis Daugaard asked lawmakers to spend an extra $8 million shoring up the health care plan for state employees.

The state had “underestimated our health care costs,” Daugaard told the Legislature in a televised speech, and now needed to dip into its coffers to make up the difference.

What Daugaard didn’t highlight was that the cost overrun was about more than rising health care expenses. The outside firm South Dakota hired to help manage its plan, state leaders say, did a poor job projecting the state’s costs — including missing budget projections by almost $5 million over two years.

“The actuary we were working with, we also felt like made a number of pretty significant errors in their work,” said Dusty Johnson, Daugaard’s chief of staff. “That also created problems.”

Seven months later, that actuary — international consultant Towers Watson — no longer was employed by South Dakota after perhaps 20 years helping the state’s health plan.

Off by $5 million

The state’s contract with Towers Watson ended last June 30. The state didn’t fire Towers Watson; rather, it let its existing contract expire. But even with the natural end of the contract, officials are treading carefully, and the new actuary is Aon Hewitt.

“We’re not eager to get into a lawsuit with them,” Johnson said, when asked for more information about the company’s involvement with the state.

For last year and this year, state officials say, overestimated savings caused them to miss budget projections by almost $5 million. That money would have had to be spent anyway, but the mistake meant the state was caught by surprise.

Poor set-up of table

Eric Ollila, executive director of the South Dakota State Employees Organization, said he was told “the actuarial table ... was set improperly for the plan, leading to these deficits.”

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Towers Watson worked as the actuary for South Dakota’s $120 million employee health care plan for decades. In its most recent one-year contract, it was paid about $49,000 for data analysis, cost analysis of health plan options, research, actuarial consulting and other projections.

A spokesman for Towers Watson declined to comment.

Johnson allowed that all actuarial projection involves some uncertainty.

“Nobody’s got a perfect crystal ball,” Johnson said. “Did Towers Watson really make a mistake, or did we have a year that didn’t work like we expected? We had actuarial issues that didn’t make us very happy, but this is a dynamic environment that’s pretty hard to predict.”

Beyond the blame

Lawmakers on the Appropriations Committee have been more focused on the future of the health plan than what went wrong, said Sen. Jim White, R-Huron, who served on a task force studying the issue. He praised Laurie Gill, who took over as commissioner of the state’s Bureau of Human Resources last year.

“Commissioner Gill is really doing an excellent job of addressing this issue in a positive way,” White said.

But Ollila said continued problems with the health insurance plan have weakened support for the employee benefit among lawmakers.

“Legislators are concerned about the health plan because every year for the past couple years we’ve come in and had a deficit to backfill,” Ollila said. “That instability over time has eroded support of the health plan.”

This year, Sen. Mark Kirkeby, R-Rapid City, brought a bill to make state employees pay an additional $25 per month for their health coverage. Heavy opposition from the governor and the State Employees Organization defeated the proposal.

Other reasons

Actuarial mistakes weren’t the only thing — or even the biggest thing — causing the state’s health insurance costs to go up dramatically in recent years. In July 2011, the cost of the state health plan was $78 million. This year, it’s $110 million.

Part of that reflects the rising cost of health care, which for decades has gone up faster than the general rate of price inflation — though the rate of health care cost increases has fallen sharply in recent years.

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One aspect is the Affordable Care Act, which pays for expanding coverage to millions of Americans in part by levying fees on health plans. For South Dakota, that will cost more than $800,000 this year.

Perhaps the largest factor is a rise in the number of expensive medical cases. Fewer than 2 percent of the state’s employees account for more than half the plan’s total costs — a fairly typical number for large health plans, including Medicaid.

As of only two years ago, not a single South Dakota employee ever had hit the $2 million lifetime maximum the state used to apply to participants on the plan, until the Affordable Care Act banned lifetime caps. Next year, it expects multiple employees to cost the state more than $2 million in a single year.

“When people get sick, the bills are much higher than they used to be,” Johnson said. “One premature baby or one bad cancer can be millions of dollars.”

Healthy lifestyles

To manage those costs, the state has tried for years to pressure its employees to make more healthful choices. Employees are encouraged to go for walks during their daily breaks.

For the first time this year, employees can sign up for the state’s lowest deductible plan only if they complete a health screening, a health assessment and a wellness activity.

That sort of wellness promotion can help improve health and lower costs — if done right, said Jonathan Dugas, director of clinical development at the Vitality Group, which helps companies launch wellness programs.

“Health promotion, it works, but it’s not just a matter of saying, ‘Let’s just get a program and it’ll solve all of our cost problems,’ ” Dugas said.

Wellness incentives

Last year, Daugaard proposed giving financial incentives for state employees who completed wellness activities. But the Legislature cut that plan at the end of the session to free up more money for other programs, including its own budget.

The state still is pushing wellness, but with “not quite as many carrots, maybe a bit more stick,” Johnson said.

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That’s a riskier approach than focusing on incentives, Dugas said.

“What you want to do is encourage people to do those healthy things. A stick can get people there, but they probably won’t be happy about it,” Dugas said. “An incentive/reward is more likely to get people to the table on their own ... and keep them coming back because they feel there’s really something in it for them, instead of just avoiding a penalty.”

Lowering costs

More aggressively, the state has focused on employees with specific health risks — such as someone who’s pre-diabetic — to encourage them to make healthier choices.

“The reality is that the person who’s overweight or the person who’s pre-diabetic is imposing costs not just on themselves but on all their coworkers,” Johnson said. “There are things that ... it’s certainly reasonable to ask them to do, for them to manage their health.”

State employees largely are on board with this effort.

“It’s a bit cumbersome for the employees that have to be a part of that program,” Ollila said. “But I think there’s a realization overall that those case management programs are indeed going to save the plan money, and make sure also that the care that someone’s getting is effective.”

When employees do get sick, the state doesn’t just write checks for their care. It tries to steer them to hospitals with which it has signed deals for cheaper care. Case workers visit seriously ill employees to discuss treatment plans, and even give suggestions to family members about how they can help.

“We need to continue to be aggressive in what I would call health management, things like intensive case management — taking people who are sick or pre-sick and really investing a lot of resources in keeping them healthy, getting them healthy and keeping their medical bills a lot less than they would be,” Johnson said.

Not saving enough

These practices are saving the state money, but not as much as it wants or had hoped. Last year, for example, case management saved an estimated $2.1 million in medical costs. But the state had projected $4.1 million in savings.

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So to close a two-year funding gap of more than $20 million, Daugaard proposes $18 million in extra government support, of which $6.7 million comes from state taxes. He’s also asking employees to pay another $5.8 million in the form of higher deductibles and higher out-of-pocket costs.

Employees aren’t happy about that, which Ollila said amounts to a pay cut for some employees even with an increase in their salaries.

“That’s coming straight out of the employee’s pocket,” Ollila said. “Some of these increases will effectively mean some employees will be taking home less money next year, even with 3 percent across-the-board compensation increases.”

Daugaard also is asking to set aside $3 million into a reserve fund to cover future cost overruns.

White, the state senator, said he hopes the days of big cost increases in the state plan are done.

“I don’t think that it’s the state’s or the appropriators’ vision to see increases like we’ve seen in the past,” White said. “I think we have a better handle on what our expectations are for the future.”